I am using Becker and don't understand why the answer is the answer. Why are they talking about July 1 as the average date and saying only 50% of the 40% is earned? For the record, I thought "c" was right. Can someone please help?
Question 24 of 88 for L2 -
Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is
$600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred
evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts
evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as
deferred service contract revenue?
a. $540,000
b. $480,000
c. $360,000
d. $300,000
Explanation
Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as deferred revenue.
Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly (July 1
is average date), only ½ of the 40% of repairs will be in the current year.
Current year deferral ($600 x 1,000) $600,000
Earned in the current year (600,000 x 40% x 1/2) (120,000)
Deferral 12-31 $480,000
Choice "a" is incorrect. When service contracts are sold, the entire proceeds are reported as deferred revenue.
Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly, (July 1
is average date) only ½ of the 40% of repairs will be in the current year.
Choice "c" is incorrect. Since repairs are incurred evenly during the first year (July 1 is average date) only ½ of
40% will be earned in the current year.
Choice "d" is incorrect. Revenue is recognized, and deferral reduced, as the service is performed.
REG | 77
FAR | 76
BEC | 83
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ETH | 93
State Board Application pending!
